AutoNation Inc (AN) 2005 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the AutoNation second quarter conference call. [Operator Instructions]

I'll now turn the call over to our host, AutoNation.

Good morning, ladies and gentlemen, and welcome to AutoNation's second quarter 2005 conference call. My name is John Zimmerman, AutoNation's Vice President of Investor Relations. I'd like to remind you that this call is being recorded and will be available for replay at 1-800-762-7141, access code 789179 after 2:30 p.m. Eastern time today through August 3, 2005.

Leading our call today will be Mike Jackson, Chairman and Chief Executive Officer of AutoNation. Joining him will be Mike Maroone, President and CEO, and Craig Monaghan, our CFO. At the end of their remarks, we will open the call for questions. I'll also be available by phone to address any follow up issues. Before we begin, let me read our brief statement regarding forward looking comments and the use of non GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995.

Such forward looking statements involve risks which may cause the actual results or performance to be materially different. Additional discussions of the factors that could cause actual results to differ materially are contained in the Company's SEC filings. Certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliation of any such non-GAAP financial measures to the most directly comparable GAAP measures on the investor relations section of AutoNation's website at www.autonation.com.

Now, I'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson

Thank you John. Good morning. AutoNation had another solid performance. Today we reported second quarter earnings from continuing operations of $0.40 per share, an increase of 14% over prior year. We achieved record second quarter operating income of $210 million, up 7% compared to a year ago, driven by across-the-board growth in revenue and gross profit, with total revenue up 4% and total gross profit up 5%. IN SG&A we had a 70 basis point improvement as a percent of total growth profit, demonstrating continued improvement on the cost side.

June launch of GM's employee pricing program resonated with consumers. It served its purpose as an inventory reduction tool for GM. We congratulate GM on a successful and innovative campaign. We expect that the addition of the Ford and Chrysler programs in July will bring industry inventories into line as manufacturers continue to show discipline and restraint with production. We're hopeful that the entire industry will see normalized inventories in the fall of 2005. With that, I will turn it over to Craig Monaghan, our Chief Financial Officer.

Thank you Mike. As Mike mentioned, we reported record second quarter operating income of $210 million, up 7% versus a year ago and EPS from continuing operations of $0.40 per share, up 14%. Other financial items of note second quarter include the following. Rising floor plan interest rates, net of OEM assistance cost us $7 million versus Q2 a year ago in spite of significantly lower average inventory levels. If our inventories had been at last years levels, we would have incurred approximately 5 million in additional floor plan interest expense in the quarter.

The decrease in net floor plan benefit is similar to the impact in Q1, and we expect this negative trend to continue as we experience increased interest rates versus the prior year although, the effect will be partially mitigated by lower inventories during 2005. During Q2, we recorded income tax benefits in continuing operations of $5 million related to the resolution of various income tax matters. We recognized 2 million of similar benefits in Q2 2004 for a net year-over-year impact of $3 million. The resulting effective tax rate in Q2 was 36.6%, versus a Q2 2004 effective rate of 37.8%.

Excluding the one time benefits, our tax rate for the second quarter would have been 39.7%, reflecting an increase in our blended state rate. We also recognized a $96 million or $0.36 per share tax benefit as part of discontinued operations related to similar tax resolutions. We have successfully resolved the bulk of our historical audit related tax liabilities. Accruals which once measured over $900 million in 1999 are now down to approximately $60 million and are recorded in other current liabilities on our balance sheet.

As we mentioned in the past, we could experience additional tax adjustments in the future as we continue to work through various tax matters. Once we resolve our open tax matters, we expect our effective tax rate to be approximately 39.8%.

During Q2, we reinvested $47 million in our business through capital expenditures and lease buyouts, and repurchased an additional 6 million of our senior unsecured notes. We repurchased 3.9 million shares of stock for $78 million, offset in large part by 2.4 million of shares of stock option exercises that generated $30 million. We are targeting 2005 capital expenditures of approximately $130 million excluding any acquisition related spending or lease buyouts. Our full year, 2005 combined spending on share repurchases and acquisitions may approach 300 million depending on market conditions.

As for our capital structure, we announced two weeks ago that we had closed on a $600 million unsecured working capital facility, which replaced our previous credit facility. The terms of this new credit facility reflect our investment grade credit rating and underscore the significant progress AutoNation has made over the past 5 years and the confidence that our lenders have in our future business plans. We're the first and only public auto retailer to achieve an investment grade credit rating and we view this accomplishment as further validation of our business model and financial discipline. Our credit spreads on the new facility are more than 100 basis points less than the credit spreads under the credit facilities that we replaced. We expect to take advantage of additional opportunities to improve our credit spread and optimize capital structure as we move forward.

Over the last 5.5 years, our financial discipline has allowed us to reduce our total debt defined as non-vehicle debt net of cash, leased obligations and tax liabilities by over 1.1 billion. At June 30, 2005 our non-vehicle debt was 677 million, down $135 million from December 31, 2004 due to debt retirement. In addition, with the resolution of various tax matters, we have reduced our tax liability by over $100 million since yearend. Our investment-grade status, our 13% non-vehicle debt to capital ratio and continued financial discipline combined with our best in class operating and net margins puts us in great shape to capitalize on opportunities in the market today. Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks Craig, and good morning. My comments will be on a same-store basis unless noted otherwise. We're pleased with our second quarter performance where compared to the period a year ago we delivered increased revenue and gross profit with significantly reducing inventory levels and leveraging SG&A expense as a percent of gross profit. We are especially pleased with our parts and service business in the quarter and I will expand on that in a moment.

Let's start with new vehicles. AutoNation generated second quarter same-store new vehicle revenue of $3 billion, an increase of 2% on 103,000 new vehicles retailed. Year-over-year, our new vehicle gross profit per vehicle retailed increased $62 to $2,076 and gross profit as a percent of revenue held steady at 7.1%. At June 30, our new vehicle inventory stood at 51 days, 23 days less than the quarter a year ago. This represents a reduction of 27,000 units or 26%. Our diligent work on inventory this year has positioned us well to clear out 2005s, allowing us to optimize the 2006 model startup.

Turning to used vehicles, on a same-store basis, second quarter retail revenue was up 4% to 900 million on the sale of 60,000 used units. In the quarter, retail used vehicle gross profit of 107 million improved 7%. Gross profit per vehicle retailed of $1,772 improved by $115 per vehicle. In retail used vehicle gross profit as a percent of revenue was 11.7%, an improvement of 30 basis points compared to the period a year ago. We attribute this to diligent used vehicle inventory management coupled with a favorable pricing environment. At June 30, our used vehicle day supply was 42 days. While down 2 days compared to the period one year ago, our used day supply was slightly higher than planned due to a strong close to the quarter for new vehicles resulting in a higher number of trade-ins.

Overall in the quarter, Las Vegas, Phoenix, and our Florida and California markets were strong for the brands we represent while Denver and Ohio were off.

Our parts service and collision team drove impressive results in the quarter. Same-store revenue was 653 million, an increase of 7% compared to the period a year ago reflecting revenue gains in parts, service, and collision. Our efforts to grow our customer-pay parts and service business continued to drive results. In the quarter, our same-store customer-pay service and parts revenue increased 7%,compared to the quarter a year ago. We attribute this continued growth to our full disclosure, customer friendly service write up process, our aggressive service marketing program, and our ongoing pricing initiatives.

Same-store gross profit in the quarter at 285 million reflected an increase of 5% versus a year ago. Our parts, service and collision gross profit as a percent of revenue was 43.6% in the quarter, the reduction of 70 basis points compared to the quarter a year ago, resulting from a shift in mix toward wholesale parts and wholesale parts increased 9% on a same-store basis.

Turning to finance and insurance, same store revenue in the quarter increased 4% to $160 million compared to the period a year ago. Gross profit per vehicle retailed of $977 was a same-store increase of $41 per vehicle and a second quarter record for us. We attribute our ongoing solid results to our fully transparent F&I process, supported by intensive training and our preferred lender relationships that continue to strengthen and generate significant gross margin.

In closing, I'd like to reiterate how pleased we are with the results of our higher margin businesses, especially parts, service, and collision. This in conjunction with our cost-cutting efforts, inventory control, and ongoing nationwide implementation of common processes played a large part in our continued ability to leverage our cost structure thus improving our operating income margin to 4.2%, an increase of 20 basis points compared to one year ago. Many thanks to each of our 27,000 associates for their contributions to a successful quarter. With that, I will turn the call back to Mike Jackson.

Thanks Mike. AutoNation had a solid performance in the second quarter with across-the-board growth in revenue and gross profit. As we look at the balance of 05, we still expect new vehicle industry sales will be approximately 17 million units for the seventh year in row. That concludes our remarks. Operator please open the call to questions.

Thank you, sir. [Operator Instructions]

The first question comes from John Tomlinson with JP Morgan.

Hello, this is John Tomlinson can you hear me?

Yes we can, John.

Good morning. I am actually from Prudential as you know. Mike can you talk about some of the gross margin pressures or the gross margin trends at your GM dealerships and how it relates to the employee pricing. Did that improve or did that stay about the same? Can you expand on that a little bit?

This is Mike Maroone, John. We actually improved our margins very slightly at our GM stores once the program kicked off. We believe we've got a very efficient model. We also had our inventories in line, so we did not undercut the GM pricing as other retailers did and were able to hold margins and get significant increases in volume.

OK. So, do you think you could have had more volume if you matched the other retailers? Was there any kind of inventory constraint?

We had our inventories in good shape. Others may not have. We were happy with the volume we had and happy with our ability to hold margins.

OK, just one other follow-up question. Could you comment about the trends that you are seeing in the used retail market. Have you seen any kind of shift to the new at the expense of late model used in your dealerships?

We actually feel that the used car market continues to be strong. Obviously, we're watching it very carefully as we've gotten quite an influx of trade-in. We have been able to balance it and manage it. We are pleased with the used business but there does not seem to be a large trade off. We always work very hard to keep average price of our used vehicles down, at, or well below 50% of the price of new. It seems to provide us a level of security even in big incentive times.

OK, thank you very much and congratulations on the quarter guys.

Thank you.

Thank you. The next question comes from Rick Nelson with Stephens. Please go ahead.

Thank you and good morning. Mike, your same-store new car growth came in below some of your peers, below the industry unit growth. I'm wondering if you had enough inventory to fully take advantage of the employee pricing programs.

Rick this is Mike Jackson. While the industry figure-you have to bear in mind that it includes fleet. If you strip out fleet, retail for the industry is actually down in the quarter. If you then look into fleet, you can see there is tremendous growth in capital purchases by government and by corporations. That is the key factor in sustaining the overall growth of the industry number. But that is not the world we live in. We live in the retail world. Retail year-to-date is down 5%.

I got you. How about the outlook for used cars? As the industry adopts more one price selling, do you see the competitive environment heating up for those used car trade-ins?

Rick, it's Mike Maroone. It is always difficult to find good quality used cars and we compete for those on every single deal. I am not sure that the employee pricing has had a major impact or the value pricing scenario that we see in the future, I don't think it's going to have a major impact on used. I think we just have to stick with the fundamentals of the used business and continue to deliver. In this quarter, we were real pleased with our ability to expand our used car margins while really attacking the market.

Do you all see this pull forward or payback time coming later in the year once these employee pricing programs expire?

Rick, it's Mike Jackson. The point of the employee program is to reduce inventory. It's a summer clearance inventory reduction program. The manufacturers, and I have great admiration for them, are exercising restraint on production. So this is intended to spike sales and clear inventory, and in the fall, be at a more rational inventory balance. So, of course, you want to have a spike for the clearance. Then, you will return to a more normalized sales rate. That is what everyone expects. If you look at what they're doing on the production side, that is what they're planning for and I think that is very well founded.

You do not see demand falling below this normalized rate?

It is what I have said from the beginning of the year and at the first quarter. When all the dust settles, it is going to be somewhere around 17 million with a roller coaster ride in between.

Got it. Thank you.

The next question comes from John Murphy with Merrill Lynch. Please go ahead.

Good morning. I just wanted to follow-up on that inventory Mike, and you may have just answered this in your last statement. Looking at the current inventory levels, you are pretty lean. Are you finding any problem filling customer orders or customers desires as they're coming into the showroom, particularly for GM? Might that be a cause for concern in the next couple of months?

Again, I really applaud the change of behavior that we see at GM. Here, they had a program that definitely moved the market and rather than calling the plants up and ordering more production, they stayed disciplined. Another phenomenal thing is that the program is ending August 1 because it achieved its goal, which was to take down the inventory. So again, that is another change in behavior. We are very happy to see inventories where they are. At more rational levels, at more manageable levels, and I think that bodes well for the future.

On your brand mix, it shifted quite dramatically year-over-year in which I think a lot of people would interpret as a positive direction. How active are you being in divestitures and acquisitions on a net basis, or is a lot of that shift coming just from market-share losses by the Big Three?

It's Mike Maroone. We are both acquiring and divesting. This year we might have divested a couple more than we acquired , but we are actively in the market for acquisitions. Certainly, there are some consumer shifts that have impacted the marketplace. We're very happy with the balance we have and we like our portfolio the way it is today.

What do you seeing on those acquisition prices for the brands you're looking for?

We have not seen much change from what it's been the last several years.

OK. Thanks a lot.

The next question comes from Jonathan Steinmetz with Morgan Stanley. Please go ahead.

Thanks. Good morning, everyone. On the SG&A to gross, could you map out the 70 basis point decline. How much of that may have come from reduced rent expense from the operating lease buyouts, how much of it was from other items?

Jonathon, it's Craig. As you know, we do buy back leases but when it makes sense. But that is not what is driving our SG&A. Our SG&A improvements are really the work we're doing across the board as we drive to these common processes, we take out costs. We're doing a lot of work on the administrative side, we're working on consolidating our back offices, our accounting centers, and I think it's that combination of many small things that is helping us get this done.

Just to follow on a prior question on acquisitions. You have done about 8 million worth this year. Philosophically, is there any desire to slow down, or is this just a function of purchase prices and fit, and that kind of thing?

Jonathon, this is Mike Jackson. My view is - our view is that as interest rates rise, there will ultimately be reflected in valuations. You went through this period of historically low interest rates, which had an impact on valuations. So, we're sort of waiting for that bubble, if you will, to clear. I would have to say, we're beginning to see that in that we have a lot more discussions going on and there's a lot more realistic view as to valuation. As you know, we have a return target that we're very disciplined on. You could see, in the next six months to a year, a situation that we'll like the valuation picture a bit better.

Great, thank you very much.

The next question comes from Matt Nemer with Thomas Weisel Partners. Please go ahead.

Could you give us an update on your shared resource center efforts and give us a sense of how much that may be impacting the SG&A line?

Again, it's Craig. I think the big change in the past quarter with our shared resource center is we had a center in Florida and we had one in Texas, we've now consolidated them. Our core accounting operations for South Florida and Texas are all being done now in Dallas. We have roughly 90 stores that are in what we call core counting-they do about 25% accounting. We have another 22 stores that are more advanced. But I would say all in all this is still very much a work-in-progress. We're still learning our way. It is having some impact on our administrative costs, but it is not, at this point it is not a - I would not call it a significant driver.

Is this something that you would consider rolling out nationwide? Is that still on the table?

At this point we are very comfortable in rolling out what we consider core and we've got a program in place to do that. I would say that we're still experimenting or debugging our extended SRC processes.

Got it. And then second, have you ever disclosed a long-term operating margin target for the business? How much more do you think upside there is?

No, we haven't. We give a view as to where we see the marketplace. We give a view as to where we think productivity go and we believe with our diversified approach to the business both from a business site, geographically, and from brand that we can average 10 to 12% EPS growth over the years. 10 to 12 per year over the years as an average.

Okay, great, thank you.

Your next question comes from Michael Heifler with Deutsche Bank Securities.

Thank you. Good morning, everyone. I just want to go back to the inventory question and get your thinking on what is the appropriate level of inventory in terms of days supply? Does the 60 to 65 day convention still make sense?

I think for certain brands, this is Mike Jackson, 60 to 65 can make sense. If you then were to though amalgamate it for the industry, I think it should be something closer to 50. If you look at other industries, every industry is trying to figure out how to give the consumer more but do it more efficiently. To have an industry convention that is decades upon decades old that nobody's trying to figure out how to get it lower doesn't seem to me to make much sense. So 50 days is, we're very comfortable with 50 days, I'd love to see the industry there.

OK. On the margin performance in parts and service, is there an opportunity to improve those margins or should we be thinking the trend looks like the first half?

Michael, it's Mike Maroone. I think there's always opportunity but one of the things that is different in our numbers is that we have some very large wholesale operations and very successful wholesale operations that really skew those numbers. We are pretty comfortable with the margins on our customer base service and parts along with our collision margin. Where our numbers look a little bit different is when we really get a nice spike in the wholesale business and our wholesale business, on a same-store basis, was up 9% last quarter, which we were really pleased with. We're not as worried about the margins. Is there opportunity to expand those margins? Yes. And we work on initiatives every day but our margins really reflect the significant wholesale.

One last one maybe for Craig. I think you mentioned that the tax rate going forward is 39.7%, but there is the possibility that there will be more favorable tax adjustments? What should we be thinking about for the second half of the year?

I called out 39.8%, not to split hairs, but I think that is a good number for you to use. We cannot predict when these changes may or may not come. Some of them are dependent on when state statutes run or we're able to reach resolution on outstanding issues. But I'd go back to the point I made earlier, the vast majority of these historic tax issues are behind us. There's not a whole lot left to go.

Okay, thank you.

The next question comes from Gerry Marks with Raymond James. Please go ahead.

Thank you, good morning. Craig, I heard you mention in terms of the operating lease, now you had about $10 million, did you mention what the percentage of leased versus owned is that you have now?

We own about 70% of our stores.

Up to 70, okay. Mike Maroone, you mentioned, I believe one of the reasons you guys were able to improve your COGS in parts and services is, you mentioned better vendor relations. Are you now - have you gone to a complete centralized purchasing approach to your parts?

No, we have not gone to a complete approach. I think that for big-ticket items and items that are consistent across the country, we have gone to a centralized approach but it is not anywhere near touching every item in the store, nor are we purchasing parts in that manner. There are some opportunities there, we are taking advantage of them. We always looking for opportunities to consolidate our purchasing and provide our stores with a cost advantage.

Also, you're ASPs on used has a spike up over $500. Is that because of a shift in strategy with your portfolio of dealerships, or is it more of a shift in the types of vehicles you're stocking on your lots?

I missed your question. Can you start again

Your average selling price on used vehicles is up over $500 on a year over year basis. I am wondering if it is because of a shift in strategy of the type of dealerships you have in your portfolio or if it is related to the actual vehicles that you're stocking on your lots, your product and merchandising mix?

I think it is a function of a couple things. One is our increased presence in the luxury business. And I think the second area is, there are more and more used trucks coming in the marketplace, which generally are slightly more expensive than cars. I do not find that number significant when you look at how much the price of new has of gone up. The price of used has been relatively stable over the last couple of years.

Last question, maybe for Mike Jackson or Mike Maroone. Everybody is talking about the industry going more towards this one price approach, and I even heard Mike, you allude to that maybe the industry needs to be going to a lower perpetual inventory level. I guess from my standpoint, what incentive and why should we start to think that the auto makers are going to change their approach when they have so much excess capacity and really, I think, would find it in their benefit to have the dealers so aggressively competing with one another. If we go more towards the one price approach, doesn't that kind of eliminate that aggressive competition happening between all the dealers.?

I would not think about it any one price mind-set. I think there is a lesson in the reaction of consumers to the employee program and I would use the word value price. Where you put a product in front of the consumer and the price you're asking for it all built in net is attractive to that consumer. I think the days of a inflated, retail asking price that everybody knows nobody pays and then has exorbitant discounts and rebates around it, and you the consumer have to go in the marketplace and navigate all that to make sure you get a fair deal, I think the consumer says can we please put those days behind us?

So, to move to, I would call it value pricing, maybe this employee pricing can be a bridge to that. Of course, it would mean absolute price cuts of MSRP, but no one pays MSRP anyway. So come on, let's get on with it. Let's put a fair price in front of the consumer without having to make them jump through so many hoops. I think it is a much more compelling proposition. I think that is what the marketplace is telling us from this reaction to employee pricing. Okay, there will still be some negotiation and some discussion, but it is all a matter of degree and a matter of balance. It has gotten out of whack. I think this is a fantastic opportunity for the industry to take a step in the right direction. And I don't think it has to do with capacity, the issue is what is going to be attractive to consumers. I think consumers are saying, come on, put a good product in front of us, put a fair price in front of us, and that's a more straightforward way to do business. As retailers, that's what we're asking for, simplify the whole thing.

Okay. That is all I have.

Time for one more question.

Your final question will come from Chuck Grom with JP Morgan Chase.

Most have been asked already, but I was just hoping you could shed some light on the near and long term ramifications are going to be for the incentive climate in the fall and thereafter. Do you see a more rational approach after the employee discount wars stop on August 1? Thanks.

I hope so. That was the reason for my last statement. I hope this is a bridge or transition to value pricing. Now value pricing, means the consumer is still going to have a very attractive price in front of them. What they actually pay, I am not sure it is going to change that much, but how you get there can be very different. That is what we hope to see. It is still going to remain very competitive. But let us compete on a straight forward value price rather than all the rigmarole of all of the incentives and all of the discounting to get there.

Great. Just as a follow up, unlike some of your peers, it looked like your new and used margins seemed to hold up pretty well. What factors helped this performance? And then, looking to the back half, are you internally expecting this trend to continue or do you see some type of pullback happening?

There is absolutely no question that having your inventories in line when there is stress in the marketplace relative to everybody else, you are in a better position. We had already balanced our inventory, particularly we had already sold off all the aged inventory. Therefore, we were very lean, very balanced and in a position to manage our business quite professionally. My congratulations to Mike and his team, who achieved that.

Great, thank you.

That is it. Thank you for joining us today.

Thank you sir. Ladies and gentlemen, this conference will be available for replay after 2:30 p.m. Eastern today through midnight of August 23, 2005. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 789179. International participants dial 320-365-3844. That does conclude our conference for today. Thank you for your participation today. You may now disconnect.